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Energy Policy

journal homepage: www.elsevier.com/locate/enpol

economic growth in Malaysia

Chor Foon Tang

Media Utara Resources, 675, Mk4, Bukit Merah, Permatang Pauh, 13500 Penang, Malaysia

a r t i c l e in fo

abstract

Article history:

Received 26 September 2007

Accepted 25 April 2008

Available online 6 June 2008

The purpose of this study is to re-investigate the relationship between electricity consumption and

economic growth in Malaysia from 1972:1 to 2003:4. This study adopted the newly developed ECMbased F-test [Kanioura, A., Turner, P., 2005. Critical values for an F-test for cointegration in the

multivariate model. Applied Economics 37(3), 265270] for cointegration to examine the presence of

long run equilibrium relationship through the autoregressive distributed lag (ARDL) model. The

empirical evidence suggests that electricity consumption and economic growth are not cointegrated in

Malaysia. However, the standard Grangers test and MWALD test suggest that electricity consumption

and economic growth in Malaysia Granger causes each other. This nding provides policymakers with a

better understanding of electricity consumption and allows them to formulate electricity consumption

policy to support the economic development and to enhance the productivity of capital, labour and

other factors of production for future economic growth in Malaysia.

& 2008 Elsevier Ltd. All rights reserved.

Keywords:

ECM

Electricity consumption

Growth

1. Introduction

The issue of economic prosperities have always been linked to

the international trade and the inow of foreign direct investment. However, these were the age-old issues in the economic

literature. Over the past decades, one of the most debated topic

abroad is the relationship between electricity consumption and

economic growth. Ferguson et al. (2000) found that there is a

strong correlation between electricity consumption and economic

growth. This is consistent with Keyness economic framework

where consumption and income are signicantly correlated. In the

earlier studies, cointegration and Granger causality tests have

been extensively used to examine the presence of long run

equilibrium and the direction of causality between electricity

consumption and economic growth. Unfortunately, the existing

empirical studies failed to provide a consensus causality results.

Some empirical studies claimed that economic growth induces

electricity consumption to change (Chen et al., 2007), while others

defended the view that electricity consumption leads to economic

growth through the Keynesian multiplier effect (Shiu and Lam,

2004). Jumbe (2004) noted that the causal link between

electricity consumption and economic growth is of concern

because it has a signicant policy implication in a countrys

economic development. For instance, if electricity consumption

0301-4215/$ - see front matter & 2008 Elsevier Ltd. All rights reserved.

doi:10.1016/j.enpol.2008.04.026

should encourage electricity consumption. However, if economic

growth is not the result of electricity consumption, policy

initiatives that encourage electricity consumption could be

detrimental to the economy. Therefore, it is of paramount

importance for this study to afrm the causal relationship

between electricity consumption and economic growth. The

major contribution of this study is to apply the newly developed

cointegration and Granger causality tests to re-investigate the

existence of long run equilibrium relationship and causality

direction between electricity consumption and economic growth

in Malaysia. The electricity consumption in Malaysia is of interest

because of the following: rst, Malaysias electricity consumption

is the second highest among the ve ASEAN founding economies.1

The electricity consumption per capita grows rapidly since 1971

and this may be one of the important factors leading Malaysias

economic growth. The plots of the electricity consumption per

capita in kilowatt hours (kWh) and the real Gross National

Product (GNP) are depicted in Fig. 1.

From the visual inspection, we observed that both series are

moving smoothly with an upward trend over the period of

19722003. During the period of 19902000, electricity consumption per capita in Malaysia has increased from 1194.26 kWh

1

ASEAN refers to Association of Southeast Asian Nations and the ve ASEAN

founding economies are Indonesia, Malaysia, the Philippines, Singapore and

Thailand.

ARTICLE IN PRESS

3078

9

Log of Electricity Consumption per capita

Log of Real Income per capita

8

4

1975

1980

1985

1990

1995

2000

Fig. 1. The plots of log of electricity consumption (kWh) per capita and real gross

national products per capita.

per capita to 2774.07 kWh per capita. This may be due to the rapid

development of information and communication technologies

(ICTs), and other infrastructures that consume high power

electricity in Malaysia. Thus, electricity is a vital input of power

for Malaysias economic growth and development, and her vision

to become a developed country in year 2020.

Second, to the best of our knowledge, the study on electricity

consumption in Malaysia is relatively few, and limited to Yoo

(2006) and Chen et al. (2007). Both studies consistently suggested

that the variables are not cointegrated using the conventional

tests (Engle and Granger, 1987; Johansen and Juselius, 1990).

Therefore, these studies employed Granger causality test based on

rst difference vector autoregressive (VAR) model to determine

the direction of causality between electricity consumption and

economic growth in Malaysia. In this respect, those existing

studies only provide information on short run causality.

Third, Johansen cointegration technique was widely used in

examining the long run equilibrium relationship between electricity consumption and economic growth. Nevertheless, couple

studies (e.g. Reimers, 1992; Cheung and Lai, 1993) have conducted

Monte Carlo experiment to examine the nite sample performance of Johansen cointegration test. These studies found that in

nite samples Johansens cointegration test is bias toward

rejecting the null hypothesis of no cointegration. Besides that,

Huang and Yang (1996) noted that the Johansen procedure is very

sensitive to the assumption that the errors are independent

normal. When the errors are not independent normal, the

Johansen test has a tendency to nd spurious cointegration.

Moreover, the Gonzalo and Lees (1998) simulation results

indicate that Johansens likelihood ratio (LR) test tend to nd

spurious cointegration with probability approaching to one when

the order of integration of the estimated series are not purely I(1)

process. Abeysinghe and Tan (1999) demonstrated that Johansen

estimator was the worst among six cointegrating estimators (e.g.

Engle and Granger, 1987; Bardsen, 1989; Johansen and Juselius,

1990; Phillips and Hansen, 1990; Engle and Yoo, 1991; Stock and

Watson, 1993). In addition, they noted that Johansen estimator is

highly sensitive to the lag length of the VAR and the deterministic

components (i.e. constant and trend) included into the cointegrating equations. In line to that, Ahking (2002) and Hjelm and

Johansson (2005) showed that the results of Johansen tests are

highly sensitive to the choice of deterministic components. In

practice, Johansen (1992) recommended Pantula procedure to

Johansson (2005) argued that this procedure cannot overcome the

problem effectively as the procedure tend to select Model 3 (i.e. an

unrestricted constant). Therefore, the Johansens cointegration

test results provided by the earlier studies may be biased due to

the aforementioned shortcomings.

In this study, we attempt to re-investigate the relationship

between electricity consumption and economic growth in

Malaysia to ll the detected gaps mentioned above. This study

differs from the existing studies in at least three dimensions: First,

we employ the Gandolfo (1981) annual to quarterly data

interpolation technique to overcome the nite sample size

problem. Zhous (2001) Monte Carlo evidence shows that

increasing the data frequency will improve the statistical test

properties. Thus, the use of high-frequency data through the

interpolation technique may improve the power of the statistical

test used in this study.

Second, to ascertain the long run equilibrium relationship

between electricity consumption and economic growth in

Malaysia we employ the newly developed error-correction model

(ECM)-based F-test procedure (Kanioura and Turner, 2005), within

an autoregressive distributed lag (ARDL) framework. If the

variables are cointegrated, Bardsens (1989) method will be used

to derive the short and long run coefcients from the estimated

ARDL model. Third, the earlier studies on electricity consumption

and economic growth in Malaysia only provide the short run

causality with the VAR model because the variables are not

cointegrated. In this study, we will perform the modied Wald

(MWALD) test through the augmented VAR model (Toda and

Yamamoto, 1995) to determine the long run causality direction

between electricity consumption and economic growth in

Malaysia. One of the most important features of this test is that

without knowing the information of the order of integration or

cointegration, the test remains valid in examining the long run

causality with data at the level (see Bhattacharya and Mukherjee,

2002a, b; Lau and Chan, 2003). Furthermore, the use of MWALD

test may reduce the likelihood of making wrong decision on the

orders of integration and cointegration. Another advantage of

using MWALD test is because of its simplicity. On the other hand,

the Grangers test with VAR model will be used to determine the

direction of short run causality.

The remainder of this paper is organised in the following

manner. A brief literature reviews will be presented in Section 2.

The discussion on the data and econometric techniques used in

this study are demonstrated in Section 3. Lastly, Sections 4 and 5

report the empirical results and conclusion, respectively.

2. Literature reviews

The relationship between energy consumption and economic

growth was rst discussed by Kraft and Kraft (1978) with the

United States data from 1947 to 1974. They found that the

causality runs from economic growth to energy consumption.

Over the past decades, researchers have extended their idea to

examine the relationship between electricity consumption and

economic growth. The earlier empirical ndings of the causality

direction between electricity consumption and economic growth

can be summarised in Table 1. A conclusion that we can drawn

from Table 1 is that the causal link between electricity consumption and economic growth remains controversial.

Altinay and Karagol (2005) employed the MWALD test to

examine the causality direction between electricity consumption

and economic growth in Turkey over the period of 19502000.

The MWALD test evidence showed that electricity consumption

Granger causes economic growth in Turkey, but there is no

Table 1

The summaries of the cointegration and causality results of the earlier studies

No.

Authors

Countries

Study period

Econometric techniques

Cointegration

Empirical results

Causality

Cointegration

Causality

Turkey

19502000

EC-EG

Pakistan

19551996

Engle-Granger (1987)

Hsiaos (1981)VAR

Not cointegrated

EC-EG

3.

China

Hong Kong

India

Indonesia

Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

19712001

Johansen-Juselius (1990)

Granger (1988)VECM

Cointegrated

Cointegrated

Cointegrated

Cointegrated

Cointegrated

Not cointegrated

Cointegrated

Cointegrated

Cointegrated

Cointegrated

ECVEG

EC-EG

EG-EC

ECVEG

ECVEG

EG-EC

EG-EC

EG-EC

ECVEG

ECVEG

4.

Ghosh (2002)

India

19501997

Johansen-Juselius (1990)

Granger (1969)VAR

Not cointegrated

EG-EC

5.

Jumbe (2004)

Malawi

19701999

Engle-Granger (1987)

Granger (1988)VECM

Cointegrated

EC2EG

6.

Sri Lanka

19601998

Granger (1969)VAR

EC2EG

7.

Bangladesh

19711999

Johansen-Juselius (1990)

Granger (1988)VECM

Cointegrated

EG-EC

Shanghai, China

19712000

Johansen-Juselius (1990)

Granger (1988)VECM

Cointegrated

ECVEG

Squalli (2006)

Algeria

Indonesia

Iran

Iraq

Kuwait

Libya

Nigeria

Qatar

Saudi Arabia

UAE

Venezuela

19802003

Cointegrated

Cointegrated

Cointegrated

Cointegrated

Not cointegrated

Cointegrated

Cointegrated

Cointegrated

Cointegrated

Cointegrated

Not cointegrated

EG-EC

EC-EG

EC-EG

EG-EC

EG-EC

EG-EC

EC-EG

EC-EG

EC2EG

EC-EG

EC-EG

10.

Wolde-Rufael (2006)

Algeria

Benin

Cameroon

19712001

Not cointegrated

Cointegrated

Cointegrated

ECVEG

EC-EG

EG-EC

3079

8.

9.

ARTICLE IN PRESS

Aqeel and Butt (2001)

1.

2.

3080

Table 1 (continued )

No.

Authors

Countries

Study period

Econometric techniques

Cointegration

Empirical results

Causality

Congo, DR.

Congo, Rep.

Egypt

Gabon

Ghana

Kenya

Morocco

Nigeria

Senegal

South Africa

Sudan

Tunisia

Zambia

Zimbabwe

Yang (2000)

Taiwan

19541997

Engle-Granger (1987)

Granger (1969)VAR

Causality

Not cointegrated

Cointegrated

Not cointegrated

Cointegrated

Not cointegrated

Not cointegrated

Cointegrated

Cointegrated

Not cointegrated

Cointegrated

Not cointegrated

Not cointegrated

Cointegrated

Cointegrated

EC-EG

ECVEG

EC-EG

EC-EG

EG-EC

ECVEG

EC-EG

EG-EC

EG-EC

ECVEG

ECVEG

EC-EG

EG-EC

EG-EC

Not cointegrated

EC2EG

China

19782004

Johansen-Juselius (1990)

Granger (1988)VECM

Cointegrated

EC-EG

Yoo (2005)

Korea

19702002

Johansen-Juselius (1990)

Granger (1988)VECM

Cointegrated

EC-EG

14.

Yoo (2006)

Indonesia

Malaysia

Singapore

Thailand

19712002

Not

Not

Not

Not

EG-EC

EC2EG

EC2EG

EG-EC

cointegrated

cointegrated

cointegrated

cointegrated

Note: EC and EG denotes electricity consumption and economic growth, respectively. - represents the unidirectional causality. The 2 and V imply bilateral causality, and no causality, respectively.

ARTICLE IN PRESS

12.

13.

11.

Cointegration

ARTICLE IN PRESS

C.F. Tang / Energy Policy 36 (2008) 30773085

consumption played an important role in fostering Turkeys

economic development. Squalli (2006) conducted a study on

electricity consumption and economic growth in Organization of

Petroleum Exporting Countries (OPEC) members through the

cointegration and causality analyses. This study used annual data

from 1980 to 2003. The author suggests that electricity consumption and economic growth are cointegrated in all countries

through the evidence of bounds testing procedure to cointegration

developed by Pesaran et al. (2001). Furthermore, the MWALD test

results exhibited mixed causality evidence among OPEC members.

The causality evidence suggests that electricity consumption

Granger causes economic growth in the case of Indonesia, Nigeria,

UAE and Venezuela. On the other hand, economic growth is found

to Granger causes electricity consumption in the case of Algeria,

Iraq, Kuwait and Libya. Ultimately, the bilateral causality evidence

is only found in the case of Qatar and the Saudi Arabia.

Using the similar cointegration and causality approaches,

Wolde-Rufael (2006) conducted a study on 17 African countries

with annual data from 1971 to 2001. The cointegration results

between electricity consumption and economic growth are nonconsensus among African countries. Specically, only 50 per cent

of the selected African countries are cointegrated (see Table 1).

Similarly, the MWALD test evidences are also non-consensus

among the selected countries. The author found that electricity

consumption and economic growth are not related for Algeria,

Congo Republic, Kenya, South Africa and Sudan. This is contrary to

Squalli (2006) ndings in the case of Algeria. In an empirical

survey, Engel (1996) found that different sample period and/or

statistical method employed may yield different statistical

inference or nding. Therefore, one plausible reason for this

conicting result may be due to the different sample size

employed as they used the same causality test.

Yoo (2006) employed the Engle and Granger (1987) and the

Johansen and Juselius (1990) cointegration tests to investigate the

presence of long run relationship between electricity consumption and economic growth in four ASEAN countries, hereafter

ASEAN-4. Both cointegration tests results consistently suggest

that electricity consumption and economic growth are not

cointegrated for ASEAN-4 countries over the period of

19712002. The Hsiaos version of Granger causality test results

indicated that there is bilateral causality between electricity

consumption and economic growth for Malaysia and Singapore.

On the other hand, economic growth Granger causes electricity

consumption for Indonesia and Thailand, but there is no reverse

causality evidence for these two countries. A more recent paper,

Chen et al. (2007) employed the Johansens test to examine the

presence of long run equilibrium relationship between electricity

consumption and economic growth in Asian countries over the

period of 19712001. The Johansens test results suggest that the

variables are cointegrated for all the countries, except Malaysia. As

the variables are not cointegrated for Malaysia, they employed the

Grangers causality test based on rst difference VAR model to

investigate the short run causality direction between the interested variables. The estimation results suggest that the short run

causality is running from income to electricity consumption for

Malaysia, but there is no evidence for reverse causality. This

causality evidence contradicted with Yoos (2006) nding, which

is more reliable as the causality direction should be bilateral. This

is because high electricity consumption is require to support the

expansionary of industrialisation, transportation and manufacturing sectors development, which eventually lead to Malaysias

economic growth and vice versa. In view of conicting causality

result for Malaysia, difference in sample period and causality

testing procedure may be the plausible explanations (see Engel,

1996).

3081

3.1. Data

This study uses quarterly data of Malaysias electricity

consumption per capita in kWh and real GNP per capita from

1972:1 to 2003:4 (T 128). The quarterly data were interpolated

using Gandolfo (1981) technique because the data for electricity

consumption and GNP for Malaysia are available only in annual

basis. This interpolation technique is chosen because it has been

widely accepted and used in many of the published empirical

studies. Among them are Habibullah (1998), Baharumshah and

Rashid (1999) and Baharumshah et al. (2006). Furthermore, Smith

(1998) conducted Monte Carlo analysis to evaluate the effects of

the linearly interpolating technique on cointegration tests and he

found that the interpolated series does not cause any bias in the

estimates of cointegrating vectors even when the sample size is

small. The Gandolfos interpolation procedure is cited in Appendix

A. The annual raw data for interpolate was extracted from World

Bank, World Development Indicators (WDI). The Consumer Price

Index (CPI, 2000 100) is used to deate the nominal GNP per

capita into the real term.

3.2. Unit root test

The standard augmented DickeyFuller (ADF) and PhillipsPerron (PP) unit root tests have been criticised for its low power

in distinguishing between unit root and a near unit root process

(Campbell and Perron, 1991; DeJong et al., 1992). The low power of

ADF and PP unit root tests has prompted this paper to use the

Kwiatkowski et al. (1992)KPSS semi-parametric unit root test to

conrm the degree of integration. The KPSS semi-parametric

procedure tests for the null hypothesis of level (Zm) or trend (Zt)

stationarity against the alternative hypothesis of non-stationarity.

The advantage of using KPSS test is that it has superior properties

in small sample (Kwiatkowski et al., 1992). Furthermore, the test

is able to distinguish between unit root and a near unit root

process. As a result, KPSS test is perform better than ADF and PP

unit root tests. The following expressed the KPSS testing equation:

LM Zm Zt

T

X

s2 kT 2

t1

S2t

(1)

P

where St ti1 u^ i ; u^ t are the estimated residuals from the

ordinary least squares (OLS) from a regression of the time series

on a constant and a linear deterministic trend. If no linear trend is

present in the time series is only regressed on a constant. s2(k) is

the non-parametric estimate of the long run variance of u^ t and k

represents for the lag truncation parameter.

3.3. Kanioura and Turners (2005) ECM-based F-test for

cointegration

The ECM-based F-test for cointegration procedure has been

proposed by Kanioura and Turner (2005). This procedure poses

better statistical properties over the residual-based two-step

EngleGranger approach because it does not push the short run

dynamic into the residual terms. Kanioura and Turners (2005)

Monte Carlo experiment evidence shows that the ECM-based Ftest is more powerful than the two-step EngleGranger cointegration test. Moreover, Cooks (2006) Monte Carlo evidence also

supports that the ECM-based F-test has greater power than the

EngleGranger and the generalised least squares (GLS) cointegration tests. Therefore, the ECM-based F-test is considered more

reliable than the conventional cointegration tests. In order to

apply this test the order of integration must be uniform. Thus,

ARTICLE IN PRESS

3082

integration. To implement the ECM-based F-test for cointegration

we estimate the ARDL model as presented in Eq. (2).

DLEC t a f TRENDt p1 LEC t1 p2 LEGt1

p

p

X

X

di DLEC ti

lj DLEGtj t

i1

(2)

j0

order. The TREND variable is included into the testing model

because both of the series showed a strong trending pattern (see

Fig. 1). The LEC and LEG represents the natural logarithm of

electricity consumption per capita and real gross national product

per capita, respectively. The existence of long run equilibrium

relationship is tested by restricting the lagged level variables,

LECt1 and LEGt1 in the Eq. (2). It is a joint signicance F-test for

the null hypothesis of no cointegrating relation (H0: p1 p2 0)

against the alternative hypothesis of a cointegrating relation (H1:

p16p260). If the computed F-statistics is greater than the critical

values tabulated in Kanioura and Turner (2005, p. 267) we reject

the null hypothesis of no cointegrating relation. Otherwise,

electricity consumption and economic growth are not cointegrated.

If the variables are cointegrated, Bardsens (1989) method will

be used to compute the short and long run elasticities. Bardsen

(1989) noted that this approach is computational convenient and

provides efcient result. The long run coefcient is derived as the

coefcient of the one lagged level explanatory variable divided by

the coefcient of the one lagged level dependent variable and then

multiplies with a negative sign. Thus, the long run coefcient for

real income is (p2/p1). On the other hand, the short run effect is

captured by the total coefcients of the rst differenced variables

P

in Eq. (2). Thus, the short run coefcient for real income is

lj .

3.4. Causality tests

In this study, we employed the Granger and MWALD causality

tests to gauge the short and long run causality through the

following VAR and augmented VAR models, respectively. This

study will not offer a detail explanation on Grangers test because

it has been well dened in the existing literature. However, this

study do not include the deterministic trend variable into the VAR

model for testing the short run causality as there is usually no

trending pattern occur in rst differenced series.2 To implement

the short run causality through the Grangers causality test, we

estimate the Eq. (3) and the F-test is use for restriction on the

parameters of the VAR model. From Eq. (3), the alternative

hypothesis, A12,k608k implies that economic growth Granger

causes electricity consumption; whereas if A21,k608k holds, the

electricity consumption Granger causes economic growth in the

short run.

The VAR model for Granger testshort run causality:

"

# " # "

# "

#

A11;1 A12;1

a1

DLEC t1

DLEC t

A21;1 A22;1

a2

DLEGt1

DLEGt

"

# "

#

A11;k A12;k

DLEC tk

A21;k A22;k

DLEGtk

"

#

x1t

(3)

x2t

For the long run causality, we use the MWALD test developed by

Toda and Yamamoto (1995). Zapata and Rambaldi (1997)

2

documented that both likelihood ratio test and Wald test are

very sensitive to the specication of the short run dynamics in

error-correction model (ECM) even in large samples. Furthermore,

they noted that given the performance of the tests in larger

samples, the MWALD test has better appeal because of its

simplicity. In order to employ the MWALD test, we pre-specify

the maximal order of integration (dmax) for the series in the

system and the optimal lags order (k) for the VAR. We use

dmax 1 because it performs better than other orders of dmax (see

Dolado and Lutkepohl, 1996). To ascertain the causality direction

between electricity consumption and economic growth, we

estimate the following augmented VAR(k+dmax) models shown

in Eq. (4). The optimal lag length k is determined by Schwarz

Bayesian Criterion (SBC).

The augmented VAR model for MWALD testlong run

causality:

"

# " # "

#

"

#

B11;1 B12;1

j1

a1

LEC t

TRENDt

B21;1 A22;1

j2

a2

LEGt

"

#

"

#

B11;k B12;k

LEC t1

B21;k B22;k

LEGt1

"

# "

#

B11;p B12;p

LEC tk

B21;p B22;p

LEGtk

"

# "

#

LEC tp

x1t

(4)

LEGtp

x2t

where D is the rst difference operator, k is the optimal lag order

and p represents the (k+dmax) lag orders. From Eq. (4), B12,k608k

implies that the economic growth Granger causes electricity

consumption; whereas if B21,k608k holds, the electricity consumption Granger causes economic growth in the long run.

4. Empirical results

The unit root tests results are summarised in Table 2.

At 5 per cent signicance level, the result of KPSS test indicates

that all the estimated variables are non-stationary at level, but it is

stationary after rst differencing. This implies that real income

per capita (LEG) and electricity consumption per capita (LEC) are

integrated of order one, I(1) process. These results are consistent

with the notion that most of the macroeconomic variables are

non-stationary at level, but become stationary after rst differencing (Nelson and Plosser, 1982).

With this nding we can proceed with the ECM-based F-test

for cointegration. A common practice in performing ECM-based Ftest for cointegration is to determine the optimal lag order. The

SBC statistic indicates that ARDL(9, 5) is the best lag orders

combination and the estimation outputs are reported in Table 3.

Batteries of diagnostic tests were performed on the nal ARDL

model. In particular, the Ramsey RESET test failed to reject the null

hypothesis of no general specication error. Thus, the model is

free from specication error. The BreuschGodfrey LM test

exhibited that the residuals are not serially correlated. Unfortunately, the plot of CUSUM of Squares statistic crossed the 5 per

cent critical bounds (see Fig. 2). Thus, the estimated coefcients

are not stable over the period of 19861995. The rapid expansionary of export-orientated and manufacturing industries in

Malaysia since 1980s may be the plausible explanation of this

structural break. This is also in line with Malaysian government

policy to attract more inux of foreign direct investment into

high-technology manufacturing sectors. Thus, the electricity

consumption in Malaysia may grow rapidly and hence caused

this structural break.

ARTICLE IN PRESS

C.F. Tang / Energy Policy 36 (2008) 30773085

3083

Table 2

The results of unit root tests

Variables

ADF

PP

KPSS

Tm

tt

Z(tm)

Z(tt)

Zm

Zt

Level

LECt

LEGt

1.247 (9)

0.902 (9)

3.124 (9)

2.770 (9)

1.198 (7)

1.206 (5)

1.178 (7)

2.453 (5)

1.371 (9)*

1.334 (9)*

0.116 (9)

0.080 (9)

First difference

DLECt

DLEGt

1.327 (8)

2.873 (8)***

1.480 (8)

2.876 (8)

4.522 (9)*

5.244 (9)*

4.610 (9)*

5.233 (9)*

0.197 (7)

0.088 (5)

0.139 (7)***

0.053 (5)

Note: The t, Z(t) and Z statistics refer to the ADF, PP and KPSS unit root tests, respectively. The subscript m and t indicate the models that allow for intercept term and both an

intercept and a deterministic trend, respectively. The asterisks *, ** and *** denotes the signicance level at 1, 5 and 10 per cent, respectively. The optimal lag length for ADF

test is selected using SBC while the bandwidth for PP and KPSS tests are selected using Newey-West Bartlett kernel. Figures in parentheses indicate the optimal lag length

and bandwidth. The critical values for ADF and PP tests are obtained from MacKinnon (1996) while the asymptotic critical values for KPSS test are obtained from

Kwiatkowski et al. (1992).

Table 3

The results of error-correction model-based F-test

Variables

ECM-based F-test

(9, 5)

4.336

Critical values

1 per cent

5 per cent

10 per cent

8.12

5.94

4.86

Note: The optimal lag length is selected by SBC. The asterisks *, ** and *** denotes

the signicance level at 1, 5 and 10 per cents, respectively. The critical values in

above are obtained from Kanioura and Turner (2005, p. 267) Table 1.

R2: 0.851; adjusted R2 0.824.

F-statistics: 31.511 (0.00).

Jarque-Bera: 7.701 (0.02).

Breusch-Godfrey LM test: 4.376 (0.112).

Ramsey RESET test: 0.681 (0.409).

( ) refer to p-value.

relationship between electricity consumption and economic

growth, a joint signicance F-test for H0: p1 p2 0 was

performed. The computed F-statistic is 4.336 that smaller than

the 10 per cent critical value, indicating that electricity consumption and economic growth in Malaysia are not cointegrated. Thus,

these variables are not coalescing in the long run, and this is

consistent with Yoo (2006), and Chen et al. (2007) cointegration

test results. A remarkable nding from this study is that

increasing the data frequency and the application of more advance

cointegration technique may not alter the cointegration results.

Next, the Grangers and MWALD tests are used in this study to

determine the direction of short and long run causality even

though the variables are not cointegrated.3 These causality tests

3

Traditionally, if the economic variables are not cointegrated, then one can

determine the short run causality based on rst difference VAR model. In contrast,

ECM will be specied to determine the short run causality (signicant of the rst

differenced series) and long run causality (signicant of the lagged level errorcorrection term) if the variables are cointegrated. These denitions imply that the

rst differenced series is used to measure the short run causal effect, while the

series at level is used to measure the long run causal effect. The MWALD test

developed by Toda and Yamamoto (1995) and Dolado and Lutkepohl (1996) has

been extensively used to investigate the long run causality as the causal inference

was conducted in the level augmented-VARs that may contain integrated and

(non-) cointegrated processes (e.g. Bhattacharya and Mukherjee, 2002a, b; Lau and

Chan, 2003). In order words, the MWALD test can be used to examine the long run

causality irrespective of whether the variables are cointegrated or not as the causal

relationship was conducted in the level augmented-VARs. Therefore, it is perhaps

not surprising that long run causality can exist even though the variables are not

cointegrated because the cointegration and causality tests serve different purposes

model. Therefore, we employed the SBC to choose the appropriate

lag structure of the VAR model. The results of the causality

analyses are reported in Table 4. For the short run causality, the

Grangers test results showed that the electricity consumption

and economic growth in Malaysia Granger causes each other.

These causality ndings signicantly support the Yoo (2006)

results, but contrary to Chen et al. (2007), which found only one

direction of causality. A new contribution from this study is the

evidence of a set of long run causality through the MWALD testing

procedure. Consistently, the MWALD test results indicate that

electricity consumption and economic growth in Malaysia showed

bilateral causality. This nding exhibit that without knowing the

order of integration and cointegration of the variables we surmise

that the electricity consumption and economic growth Granger

causes each others in the long run. Interestingly, both causality

tests consistently imply that Malaysia is an energy-dependent

country (i.e., LEC-LEG), thus efcient use of energy and energy

development policies will have positive effect on economic

growth. This nding is in line to the rapid development of ICTs,

manufacturing, and other infrastructures industries that consume

high power electricity in Malaysia. Thus, electricity is an

important input of power for Malaysias economic growth and

development toward the vision of becoming a developed country

in the year 2020. In this respect, better management on energy

growth policies are require to ensure that the electricity is

sufcient to support the Malaysias economic development.

5. Conclusions

The intention of this study is to re-investigate the role of

electricity consumption on economic growth in Malaysia over the

period of 1972:12003:4. Due to the nite sample size problem,

this study adopted the Gandolfo (1981) interpolation technique to

derive the quarterly data from the existing annual raw data. An

interesting nding from this study is that the increased data

frequency did not improve the cointegration result. This is in

line with Hakkio and Rush (1991) ndings that conceptually

(footnote continued)

(see Dufour and Renault, 1998; Dufour et al., 2006, for detail explanation of long

run causality). For example Wolde-Rufael (2006) found that electricity consumption and economic growth are not cointegrated, but MWALD test shows evidence

of either unidirectional or bilateral causal relationship between electricity

consumption and economic growth in the case of Egypt, Ghana, Senegal and

Tunisia. In addition to that, the author also shows that the presence of

cointegration does not necessarily implied causation (e.g. in the case of Congo

Republic and South Africa).

ARTICLE IN PRESS

3084

1.2

30

CUSUM

5% Significance

1.0

20

CUSUM of Squares

5% Significance

0.8

10

0.6

0

0.4

-10

0.2

-20

0.0

-30

-0.2

80 82 84 86 88 90 92 94 96 98 00 02

80 82 84 86 88 90 92 94 96 98 00 02

observations

Table 4

The results of Granger and MWALD tests

Null hypotheses

w -statistics

LEGQLEC

LECQLEG

22.672*

14.981*

31.151*

21.086*

Note: The asterisks *, ** and *** denotes signicance level at 1, 5 and 10 per cent,

respectively. Q represents does not Granger causes.

the data frequency, it will not alter the cointegration result.

Therefore, the ndings of this study suggest that electricity

consumption and economic growth are not moving together in

the long run.

However, the standard Grangers and MWALD tests reported

bilateral causality evidences between electricity consumption and

economic growth in Malaysia. These imply that electricity

consumption is an important element for Malaysias economic

development as Malaysia is an energy-dependent country. This

high demand of electricity is parallel with Malaysias economic

policy toward the vision of becoming an industrialised and

developed country in the year 2020. Therefore, sufcient supply

of electricity is required to support the industrial development

and to enhance the productivity of capital, labour and other

factors of production.

In view of policy implication, the ndings of this study suggest

that electricity consumption played an important role in economic

development. Therefore, policies to manage the supply of

electricity are required to ensure that the electricity is sufcient

to support Malaysias economic development. In addition to that,

the Ministry of Water, Energy and Communications department

should continue to explore new resources and expand the

electricity supply via hydroelectricity power station in Malaysia

because it is environmental friendly, renewable, cost-effective and

stable compared with fossil fuel.

Acknowledgements

The author would like to thank the anonymous referees and

Nicky France (Editor) of the Energy Policy for their insightful

comments and suggestions. The usual disclaimer applies.

(GNP) are not available in quarterly series, the Gandolfo (1981)

interpolation method was used in this study to compute the

quarterly series from annual data. In undertaking the derivation of

the interpolation formula, the observed values are actually

integrals. Therefore, we must integrate the quadratic function in

order to obtain the quarterly formula. After satisfying all the

conditions in any year t, the formula to compute the quarterly

series are presented as follows:

1st Quarter : y1

t 0:0546875yt1 0:234375yt

0:0390625yt1

(A.1)

2nd Quarter : y2

t 0:0078125yt1 0:265625yt

0:0234375yt1

(A.2)

3rd Quarter : y3

t 0:0234375yt1 0:265625yt

0:0078125yt1

(A.3)

4th Quarter : y4

t 0:0390625yt1 0:234375yt

0:0546875yt1

(A.4)

where yt, yt1 and yt+1 are the current, lag and lead values of the

annual data. For instance, to obtain the rst quarter series for

electricity consumption, one may substitute the annual electricity

consumption values for yt, yt1 and yt+1 into Eq. (A.1). The similar

way was used to compute the series for second, third and fourth

quarters, respectively. It is worth to point out here that, two

annual observations will be loss due to the one period lead and lag

values of the annual data. Therefore, we are able to compute the

quarterly series from 1972:1 to 2003:4 if the annual data from

1971 to 2004 are used to interpolate.

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